Investing - Asset Allocation - Part 3

[This post is written and copyrighted by FIRE Finance (]

Editor's Note: This post was published at the Carnival Of Investing #61.

[Continued from Investing - Asset Allocation - Part 2]

Static Models of Asset Allocation

In part 1 we have familiarized ourselves with the basics of asset allocation along with 2 very useful and interactive asset allocation calculators. In part 2 we described suggested models from Fidelity and Charles Schwab. In this part we shall explore static models of asset allocation from Etrade.
3. Etrade: The static asset allocation models from Etrade are shown below. Only the first model is suitable for taxable accounts; the rest are suggested for tax exempt accounts. One can always invest the fixed income portion in tax exempt accounts such as Roth IRA or tax deferred accounts such as 401(k) and traditional IRA. The remaining stock investments can be made in a regular brokerage account. That's exactly what we have done. We find the aggressive growth model to be extremely risky one. Rather the growth model is more an appropriate match with our investing goals and profile. Please click on the image below to get detailed view of the models. Here is the list of definitions from Etrade.

Aggressive Growth - Taxable

This portfolio is appropriate for investors seeking maximum long-term capital appreciation even though fairly frequent severe losses are likely. An investor with this profile has an extremely long-term time horizon and a very high tolerance for investment risk, and seeks to maximize potential return.

Growth - Tax Exempt
This portfolio is designed for investors whose primary objective is capital growth with no need for current income. Investors with this profile have a high tolerance for risk, but are not willing to speculate by accepting the most extreme risks. This portfolio may experience significant short-term risk, but the investor's time horizon and risk tolerance permits the investor to experience these risks in an effort to maximize long-term investment returns.

Balanced Growth - Tax Exempt
This portfolio is most appropriate for an investor who seeks a balance between long-term capital appreciation and current income, with an emphasis on capital growth. This investor also has a fairly high tolerance for short-term investment risk. Investors with this profile have little need for current income and seek investment growth without extreme investment risk.

Balanced - Tax Exempt
This portfolio is designed for an investor that can tolerate the investment risk associated with making capital growth and current income equal priorities over the long-term. This investor does not require a high level of current income from a portfolio, and is seeking capital appreciation. But the investor's risk tolerance does not permit putting capital appreciation before income.

Balanced Income - Tax Exempt
This portfolio is appropriate for an investor who can tolerate a modest amount of investment risk but also desires some capital growth over a longer period. The primary objective of an investor within this risk tolerance range is to achieve a balance between growth and income, with a bias towards income and avoidance of extreme risk.

Risk Averse - Tax Exempt
This portfolio is appropriate for the investor who has a somewhat longer time horizon (medium-term to long-term) but seeks to avoid investment risk. This investor's portfolio is designed to produce a small amount of capital appreciation, with current income and a fair amount of stability. While this risk tolerance range is still designed to preserve the investor's capital, relatively small fluctuation in portfolio values may occur from year to year.

Preservation of Principal - Tax Exempt
This portfolio is designed for the investors who have imminent short-term cash needs or those who are extremely risk averse. Investors with this profile are seeking stability and liquidity from their investable assets. The main objective of an investor in this risk tolerance range is to preserve capital. Fluctuations in the values of portfolios within this range are minor, though there is a slight probability of principal loss.

In the next posts we shall review models suggested by Vanguard and American Funds. We hope the tools suggested above would help us get started on asset allocation. We would love to hear about your experiences regarding asset allocation. Feel free to share with us.

[Continued to Investing - Asset Allocation - Part 4]

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